This invention relates generally to assessing loss severity for commercial loans and, more particularly, to network-based methods and systems for assessing expected and unexpected loss outcomes for commercial loans.
Commercial lenders generally engage in the business of issuing loans to borrowers, such as other business entities. Borrowers of commercial loans typically use the loans for financing or expanding their business operations. The ability of the borrowers to pay back the loans may often depend on the profitability of the borrowers' business.
Commercial lenders typically have a portfolio of loans which may include numerous loans made to a plurality of different borrowers. Because many commercial lenders are engaged in the business of loaning money, these commercial lenders continuously monitor and manage their portfolios in an effort to enhance the financial profits of their respective companies. In managing these loan portfolios, at least some commercial lenders will quantify risks associated with each loan and assess potential losses that may result from each loan. For example, a commercial lender may review a loan within its portfolio in an attempt to quantify the risk associated with the borrower defaulting on the loan. The commercial lender may also attempt to assess the potential loss from such a default.
Losses, and the predictability of losses, may impact how a commercial lender may provide financing in the future, namely whether the lender is able to provide financing from its own equity capital (i.e., equity) or from borrowing in the market (i.e., debt). In the commercial lending industry, the allocation of equity versus debt is at least sometimes a function of how well the lender understands the uncertainties associated with losses in their business.
The risk associated with each loan and the predictability of losses may also influence whether a lender will make a profit, or a certain amount profit, on each account. Moreover, in at least some cases, a commercial lender may attempt to predict losses because the amount of debt used for financing by such a lender may be directly related to the predictability of losses (e.g., the more predictable, the more the lender can finance from debt). In addition, a commercial lender may attempt to predict losses so that it can establish reserves to cover such losses. Consequently, the more accurately a commercial lender is able to predict losses, then the more accurately it can establish reserves and provide additional financing to borrowers. Accordingly, the ability to accurately predict losses by a commercial lender better enables that commercial lender to be a more profitable business.